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AlphaLab/target
Ron Morris recaps :harveted on Oct 31, 2008 from http://www.taeradio.com/newsletter-articles/2008/10/31/two-topics-for-the-price-of-one.html by Ron Morris On Tuesday, October 28th, I had the privilege of attending the final presentations for the first six “graduates” of AlphaLab. Quick perspective – AlphaLab is an offshoot of Innovation Works, a quasi public/private endeavor dedicated to the formation of start-up businesses in western Pennsylvania. These companies typically are high-tech in nature and AlphaLab is basically looking for the next FORE Systems. AlphaLab is an “incubator.” From about sixty plus applications, a total of six companies were invited to move in to a physical facility on the South Side (East Carson Street) with the idea in mind that they would create business plans for their unique product/service ideas. Once there, they were given office space, access to mentors --- including attorneys and accountants --- conference rooms, all of the requisite “back-office” gear such as copiers, printers, and the like. Perhaps most importantly, all six chosen start-ups were given a $25,000 stipend. Since most of these companies are comprised of young, struggling entrepreneurs, that $25K looks like millions! After five months, each start-up was ready to make its final presentation. I enjoyed every one of them as they were obviously passion-driven pitches that truly were the essence of entrepreneurial thinking. It was clear to me that these young people have been contemplating their ideas deeply and fully for a considerable amount of time. I really can’t say which of the six was superior. They were all terrific and they all seemed feasible. Of course, there are holes, but entrepreneurs are very good at “work-arounds.” These holes will be filled. Needless to say, $25,000 doesn’t get you very far. The presentations were all oriented towards raising angel or venture money. The pre-money valuations of these companies ranged from as low as a half a million dollars and there seemed to be no upper end on a couple of them. Again, I think your chances of succeeding with any of these companies are reasonable … for an unproven start-up. (Translation: You’ve got one chance in one hundred of hitting a home run; maybe one chance in twenty of getting your money back; and one chance in fifty of actually making a few bucks.) But this (incubator) is precisely what our region needs. Think about it. There are literally thousands of small, struggling entities in this region. Each and every day they are grinding it out, trying to break through. Some of these companies are led by “cone-heads” (a term of endearment), some by sales people, and some by beaners. In all of these cases, they probably lack their significant counterpart. In other words, the beaner needs a sales person and the cone-head needs a beaner. This all tends to work itself out over time. The problem is … time costs money and few of these companies have any financial staying power. The odds of success I gave above are the odds generally quoted for typical start-ups. But these companies are not “typical.” In point of fact, and in my opinion, the chances of success are probably considerably better than posted. I say this because these companies have had tremendous advantages during their embryonic stages. Think about it … when you have guys like Frank Demmler, Jim Jen, and Rich Lunak (to name just a few), wandering around the incubator offering insight and advice, you are way ahead of the “typical” start-up. These wise and scar-tissued gentlemen (and ladies) can, in the breath of just one sentence, enable fledging companies to avoid rat-holes and rat traps altogether. Moreover, a word from a guy like Demmler (who has intimately been involved in the creation of hundreds of start-ups) can translate to millions of dollars in revenues and/or costs avoided. I’m very serious when I say this. You simply cannot put a number on the value of an experienced mentor … particularly during gestation. One of my companies has already formed a strategic alliance with one of these start ups. Really. That’s just how fast small companies can move. Were this an established corporation with numerous personnel and millions of dollars in assets, we would probably be right now scheduling a luncheon, the purpose of which would be to figure out a meeting date for all of the relevant players. With luck, this meeting could happen before Thanksgiving. The reason Sillicon Valley is so fecund with promising baby companies is that northern California has “in place” a seasoned and productive infrastructure that lubricates the rails that host the start-up train. It’s a matter of picking up the phone … lawyers, accountants, suppliers, marketeers, P.R. geniuses (with incredible connections), Internet experts, strategists … they’re all on the other end of that line. It is truly a machine. And this machine is itself oiled by a government that seems to both “get out of the way” and/or aid and abet the entrepreneurial process. Years and years ago, I had a company that was based in San Jose and I saw this for myself. Just one of the many differences between NoCal and the Burg is a simple little law that, in effect, eliminates altogether the problem of non-compete agreements. Without getting complex or into a long explanation, this “law” states that you cannot compel an employee to sign a non-compete agreement unless you provide that individual with significant equity or stock options in your company. So, the business owner has two choices: first, he/she can not provide equity and thus run the risk of losing a key employee (especially when the company becomes successful). Or, he/she can hold on to that employee (until, of course, a liquidity event also known as a company sale --- takes place) and that employee will eventually (most likely) become wealthy, at which time he/she oftentimes invests a considerable portion of his/her windfall into his/her own start-up. Cool, eh? A simple law that foments business formation. What do we have here in Pittsburgh? Don’t ask … Anyway, I’m excited. For an overview of these companies and their strategies, simply go to AlphaLab’s website. See if you are as impressed as everyone else who was in that room that day. And congratulations to all of the people at Innovation Works/AlphaLab who conceived and then implemented this wonderful program. This is truly a case where the private sector gains from its relationship with the non-private sector. Frankly, I’m always skeptical when these two disparate sectors try to “mate.” By the way, AlphaLab closes applications for its next “class” of six companies at midnight on October 31. Again, just go to their website for details on how you can apply for both the space and the dough!